CAAMP’s Spring Mortgage Report 2015



CAAMP’s semi-annual mortgage surveys have gobs of data that gauge the pulse of the market. But the best parts of these reports are the new data points that shed light on previously unexplored topics. This year’s Spring Survey didn’t disappoint in that sense.

It reveals brand-new numbers on topics ranging from the risks of increasing the minimum down payment to pre-approval utilization to mortgage rate shopping habits.

Without further ado, below are the key numbers with selected key stats in red. Our comments in italics.

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CAAMP Spring report 2015

Who’s buying homes today?

  • 620,000 households move into dwellings they have purchased each year.
  • 45% (280,000) are first-time buyers.
    • Most of these are between the ages of 25 and 34.
  • Just over 20% (130,000 per year) are making their second purchase.
  • One-third (210,000 per year) are making their third or subsequent purchase.

 

What are they buying?

  • 57% (360,000 people) bought single-detached homes.
  • 10% (60,000 people) bought semi-detached homes and row homes.
  • 19% (120,000 people) bought condominium apartments.
  • Of the above housing types, the percentage of units that sold for more than $1 million was: slightly above 1%.
  • For repeat buyers, the average difference between prices paid for newly acquired homes versus prices received for the homes they sold was: $28,500.
  • The percentage of these repeat buyers who purchased a home with a lower price than the one they sold: 38%.
  • The percentage of repeat buyers who “move sideways”  — that is bought and sold a house at around the same price: 1%.
  • The percentage of buyers who “moved up” — i.e., bought a more expensive house: 61%.
    • One mortgage feature that is routinely undervalued is a competitive port and increase option. If there’s a reasonable chance you’ll move and need a bigger mortgage before maturity, then (other things equal) lean towards a lender that provides:
      • the ability to increase the mortgage with no penalty
      • more than 30 days to port the mortgage with no penalty
      • assurance of a competitive rate on any new money that you add to your mortgage
      • no restrictions against refinancing elsewhere (for maximum flexibility)

 

Financing Methods

Some stats on down payments:

  • The average down payment made by homebuyers in the survey: $119,000
    (or about one-third the price of the home).
  • The average down payment made by first-time homebuyers: $67,000
    (or 21% of their average purchase price).

    • Despite the consistency of this number in CAAMP’s reports, this is one stat we can never wrap our head around. RBC found a few years back that only 38% of first-time buyers planned to make a down payment more than 10%. For the last two years, BMO has found the average first-timer’s down payment to be 16-19%. Perhaps it’s a matter of how the question is posed to respondents.
  • Percentage of first-time buyers who put down 20% or less: 62%.
    • This number isn’t as useful as it could be. We’d love to see stats on the number of newbie buyers who put down less than 20% (i.e., the number who needed default insurance or secondary financing above 80% loan-to-value).
  • Percentage of overall buyers who put down 20% or less: 49%.
  • Percentage of buyers who got a loan from a separate financial institution, to form part of their down payment: 1%.
    • Perhaps we’ll see a tiny uptick in this number given that
      • default insurance premiums have been increased for LTVs above 90%
      • cash-back down payments are dead as of July, and
      • parental gifts may not be able to keep pace with rising home prices.

CAAMP assessed what would happen if the minimum down payment were raised to 10% (rather than today’s 5%). It found:

  • The percentage who would have been “definitely not able” to make the purchase was 6%, or 35,000 buyers.
    • If home prices keep shooting for the moon in the GTA/GVA, 35,000 affected buyers may not be enough to convince regulators that raising the minimum down payment is a bad idea.
  • The number who would have been “probably not able” to make the purchase: 80,000.
    • This number is the wildcard. No one knows how many buyers would find a way to scrape together a bigger down payment. Home hunters can get pretty creative. On the other hand, if even half of these people couldn’t buy, and we add that to the above 35,000, then we’re talking about removing over 10% of sales from the market in a given year.

“A 10% down payment requirement would have resulted in a reduction of sales large enough to have tipped many local housing markets into downturns, causing price reductions, which would have caused significant negative consequences for local economies,” says study author and economist Will Dunning.

 

Sources of down payments

  • For overall buyers, percentage of down payment that came from loans and gifts from parents and other family members: 7%.
  • For first-time buyers, percentage that came from loans and gifts from parents and other family members: 18%.
    • This is a noteworthy increase from the 11% figure for 2010-2014 home buyers.
    • Note that Genworth Canada recently found that 28% of its first-time insured buyers used gifted money for part/all of their down payments.
  • For overall buyers, percentage of down payment that came from RRSP withdrawals (typically via the Homebuyers Plan, but not always): 3%.
  • For first-time buyers, percentage that came from RRSP withdrawals (typically via the Homebuyers Plan, but not always): 10%.
  • Percentage of down payment funds that came from credit cards: 0.2%, or $100 million.
    • Default insurers are sometimes criticized because they allow credit card down payments. This stat suggests the risk is far less than some believed. Either way, you can bet your boots that lenders and insurers are underwriting such applications extra carefully. That and insurance premium surcharges help keep credit card down payments a very contained risk.
  • Percentage of down payment funds from overall buyers that came from Tax-Free Savings Accounts: 2%.
  • Percentage of down payment funds from first-time buyers that came from Tax-Free Savings Accounts: 5%.
  • Of buyers who had used funds from an RRSP, percentage who had borrowed money to top up that RRSP: 16%.
  • Number of the 620,000 annual homebuyers who bought their home outright (with no financing on the property): 80,000.

Of purchasers with mortgages:

  • Percentage who chose fixed-rate mortgages: 72%.
    • 51% of Canadians choose a 5-year fixed, Dunning tells CMT.
  • Percentage who chose variable or adjustable rate mortgages: 21%.
    • 6% of mortgagors choose variable rates with terms less than five years.
  • Percentage who chose a hybrid (part fixed and part variable): 7%.
    • Hybrids, which offer valuable interest rate diversification, are perennially the most underrated mortgage term in Canada.

 

The process

Mortgage originations:

  • Percentage of mortgages that were from banks: 52%.
  • Percentage of mortgages that were from brokers: 34%.
    • The remainder of Canadians used credit unions, insurance companies, trust companies and other lenders.
  • First-time buyers are more likely to use mortgage brokers than any other segment. 39% do so.
    • This is a glaring difference from CMHC’s recent estimate (55%). Dunning suggests the number may differ because of how the survey question is asked. “…Many consumers won’t know the difference between a mortgage broker versus a mobile mortgage specialist,” he said. “For that reason our wording is specific, asking about [a] ‘representative from a Canadian bank’…”
  • Percentage of first-time buyers who obtained their mortgage from a bank: 47%.
  • Percentage of buyers who have purchased two or more homes who obtained their mortgage from a bank: 58%.

 

What are they buying?

  • Average price paid by a first-time buyer, from 2013 to present: $308,061.
  • Average price paid by overall buyers, from 2013 to present: $347,361.
  • Percentage of second-time purchasers who ‘moved up’ to a pricier property: 75%.

 

Prices paid by homebuyers vs. their initial planned price:

  • Percentage of buyers whose actual price was 100%-109.9% of their target budget: 19%.
  • Percentage of buyers whose actual price was 110%-119.9% of their target budget: 5%.
  • Percentage of buyers whose actual price was 120% or more of their target budget: 3%.

Resale prices TO-Van vs ROC

This graph above depicts Canada’s two-tier housing market, perhaps as well as any.

 

Percentage of Pre-Approved Amounts That Were Actually Borrowed

  • Actual prices paid were 93% of the buyers’ target maximum budget, on average.
  • Percentage of pre-approved mortgage amounts that were actually borrowed by overall buyers: 76% was utilized.
  • Percentage of pre-approved mortgage amounts that were actually borrowed by first-time buyers: 81% was utilized.
  • Percentage of buyers who borrowed all of their pre-approved mortgage amount: 12%.
  • Percentage of buyers who borrowed more than their pre-approved mortgage amount: 6%.

 

Mortgage Insurance

  • Among overall homebuyers who have mortgages, percentage who report that their mortgage is insured: 55%.
  • Among first-time homebuyers who have mortgages, percentage who report that their mortgage is insured: 63%.

 

Terms for Mortgages (for homes purchased from 2013 to present)

  • Percentage of buyers who chose a term of 1 year: 4%.
  • Percentage of buyers who chose a term of 2 years: 8%.
  • Percentage of buyers who chose a term of 3 years: 9%.
  • Percentage of buyers who chose a term of 4 years: 7%.
  • Percentage of buyers who chose a term of 5 years: 67%.
  • Percentage of buyers who chose a term of 7 years: 1%.
  • Percentage of buyers who chose a term of 10 years: 4%.
  • Percentage of buyers who chose mortgage terms of less than five years: 25%.
  • Percentage of buyers who chose mortgage terms longer than five years: 5%.

 

Amortization Periods for Mortgages (for homes purchased from 2013 to present)

  • Percentage of buyers with amortizations of 25 years: 51%.
  • Percentage of buyers with amortizations of more than 25 years: 14%.
    • In many cases, amortizations over 25 years are underutilized. Paying off a mortgage is frequently not the best use of cash, depending on the borrower’s other opportunities and debts.
  • The average amortization period for overall buyers: 22.1 years.
  • The average amortization period for first-time buyers: 22.7 years.
  • The number of years earlier that borrows expect to pay off their mortgage, ahead of their contracted amortization: 5 years.

 

Average interest rates

  • The average interest rate for homes purchased in 2014: 3.00%.
  • The average interest rate for homes purchased so far in 2015: 2.68%.
    • This reflects the heavy concentration in higher-priced long-term fixed-rate mortgages, and the fact that some folks don’t shop rates as much as they could.
  • Percentage of buyers who gave relatively little consideration to the possibility of interest rates rising in the future: 15%.
    • Stress testing a mortgage is easy and always best practice: Here’s a calculator that can help.
  • Percentage of buyers who gave quite a lot of consideration to the possibility of interest rates rising in the future: 60%.

 

The process

Factors prompting decision to buy

  • Percentage of first-time buyers who were prompted by low interest rates: 25%.
  • Percentage of overall buyers who were prompted by low interest rates: 18%.
    • That’s almost 1 in 5. One can only imagine the reverse impact of a rising rate environment.
  • Among buyers with financing, the average number of mortgage professionals they consulted was: 1.2.
    • This number is too low. It never hurts to get a second opinion, no matter how much you trust your mortgage adviser.
  • Percentage of borrowers who said they did not obtain any rate quotes: 9%.
    • This likely means they accepted the offer from their usual financial institution—a costly decision in the majority of cases. 
  • The average number of quotes received by borrowers was: 1.6.
  • Percentage of mortgage borrowers who consulted with major banks: 76%.
    • For most Canadian mortgage shoppers, banks are still the first stop for person-to-person quotes and mortgage advice.
  • Percentage of mortgage borrowers who consulted with brokers: 56%.

 

Circumstances, Expectations and Opinions

  • Percentage of buyers who were employed full time at the time they bought their house: 69%.
  • Percentage of buyers who were self-employed at the time they bought their house: 5%.
  • Percentage of buyers who were retired at the time they bought their house: 14%.

 

Homebuyers’ Expectations for Interest Rates

  • On a 10-point scale of interest rate expectations, with 10 meaning they are expected to “go up drastically,” the score given by buyers for interest rates in the five years: 6.9.
    • Right or wrong, economists and most commentators continually reinforce this idea of coming rate hikes.

 

Mortgage Market

Here’s an interesting and somewhat unintuitive observation from the report. CAAMP’s Will Dunning notes that very low levels of interest rates mean that Canadians are paying less interest and have more money available to repay their mortgage principal.

“Therefore, a statistical analysis shows that reductions in interest rates in Canada tend to reduce the rate of mortgage credit growth…”  

This applies to today’s market, now that we’re near a purported bottom in rates. Clearly, over the long term, falling rates have had a very real impact on home prices and mortgage volume.


 

By Robert McLister & Steve Huebl

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Comments

  1. Comment avatar

    Ron Butler    

    Thanks Rob, another interesting report brought to us with insightful commentary. A couple of stand out items. Toronto and Vancouver seem to be what some economists are starting to call “world cities”, centres where property values defy gravity based on unique factors. In the USA, New York, LA, San Francisco and to a lesser extent Miami and Vegas come to mind. Let’s face it, Minneapolis may be a great place to live but no one from China or the Gulf is lining up to buy there. The GTA and the Lower Mainland seem to be places where people from all over the planet have may desire to buy property. Great news for incumbent owners and people in the property industry, not so hot for the next generation of folks who just want to buy where they grew up.

    A couple of other stats make you wonder, if 7 out of 10 people think interest rates are going up does that produce just another reason to hurry up and buy? 1 out of 5 first time buyers getting parental gifts is also a kind of odd inducement to but a house “they won’t give a nickel to buy a Mercedes but they will give me $50K to buy a house, better go buy that house” Low cost of borrowing and hearing that some folks are getting 14% rise in property values in a year; it’s all a kind of perfect storm of encouragement to ignore how high the price is and just get out there and buy a house.

     
  2. Comment avatar

    Erick Brunet    

    This is so informative and detailed. The way you show your comments and the key info also help me a lot. The bottom line is: Thanks for the great report!

     

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